Op-Ed: Beware of Energy Companies Bearing Gifts

Why PSEG and Exelon so readily volunteered to forfeit $300 million annually in nuclear subsidies
Steven S. Goldenberg

The loyal readers of NJ Spotlight were doubtlessly surprised by Tom Johnson’s June 29 article revealing an offer by Public Service Enterprise Group and Exelon Generation to give up $300 million in annual nuclear subsidies for a “new deal.” After all, to get the subsidies, the companies had to wage a protracted and contentious multiyear legislative battle and weather a controversial Board of Public Utilities proceeding in which all independent experts and BPU staff agreed that the companies had failed to prove that the nuclear plants deserved subsidies. However, PSEG’s threat to close the plants unless all received subsidies coerced the BPU commissioners to disregard the well-developed record and award the subsidies.

Against this backdrop, it is fair to ask why, after going to such extraordinary lengths to get these huge subsidies, the companies would offer to give them up? The easy answer: They want a better “deal.” To get one, the companies seek to leverage the state’s frustration with a recent Federal Energy Regulatory Commission order that could inhibit the ability of clean-energy resources — solar, wind and nuclear —to clear the regional electricity grid operator PJM’s capacity auction and receive capacity payments. The concern is that the FERC order will increase the cost of renewable energy and undermine the state’s clean-energy policies.

In response, the BPU has initiated a proceeding to explore the state’s options, which include leaving the PJM capacity market through a mechanism known as the Fixed Resource Requirement (“FRR”) alternative, which would enable the state to assume greater control of future capacity procurements. In the proceeding, PSEG and Exelon advanced a joint proposal for an “Integrated FRR Procurement” which would expand FRR to require the state to jointly procure capacity and the “environmental attributes” associated with clean-energy resources.

It is beyond the scope of this article to fully describe FRR and the companies’ proposal. (See more comprehensive comments attached).

Draconian performance penalties

Suffice it to say, FRR has never been successfully implemented in a deregulated state like ours and would represent a highly risky leap into the unknown that is fraught with danger to ratepayers and the state. It would require the BPU to assume significant and ongoing planning, administrative and oversight duties that are currently performed by PJM and have been outside the scope of the BPU’s jurisdiction for over two decades. FRR would abandon the critical consumer protections that are central to the competitive PJM capacity auctions in favor of a planned procurement approach, enforced by draconian performance penalties payable by ratepayers, under which the state would be required to accurately project its long-term capacity requirements and negotiate purchase agreements with a narrow pool of local generators dominated by PSEG and Exelon.

The companies propose to bundle the procurement of capacity with the environmental attributes associated with clean generation — the attributes purportedly captured by the existing nuclear subsidies — further complicating the approach. In response, with only two exceptions, each of the stakeholders that provided comments to the BPU, including the solar and wind companies that are the purported beneficiaries of FRR, the PJM Independent Market Monitor (IMM), JCP&L and Rockland Electric, recommended that the BPU either proceed with caution due to the substantial risks posed by FRR or to reject it outright.

It’s all about market power

Not surprisingly, the companies’ proposal is a one-sided proposition designed to leverage their considerable market power to extract windfall profits from ratepayers. Many will recall that the state wisely rejected the companies’ proposed merger in 2005 due to well-founded concerns regarding the considerable market power the combined companies would wield within PJM, power that would enable the companies to significantly increase energy costs. The Independent Market Monitor has consistently reported that market power is “endemic” and highly concentrated in New Jersey, and that PSEG (which has controlled up to 90% of generation within its zone) and Exelon are considered “pivotal” suppliers, whose output must be acquired by the state to meet its capacity requirements.

FRR would exacerbate these long-standing market power concerns by requiring the state to secure capacity primarily through bilateral agreements with the companies. The companies’ proposal would further enhance their market power through “tiered” procurements that prioritize the solicitation of clean energy, purportedly in furtherance of the state’s clean-energy goals. However, because only minimal third-party solar and wind resources are currently available, the proposed procurement would be almost completely dominated by the companies’ New Jersey and Pennsylvania nuclear plants. PSEG’s proposed acquisition of offshore wind facilities would further increase its dominant “Tier I” market share.

Putting the state at a disadvantage

Under the companies’ version of FRR, the state would have to negotiate with the companies without the benefit of PJM’s muscular ratepayer protection and market power mitigation rules. As one consequence, the state would be powerless to prevent the companies from withholding their capacity from the state and selling it elsewhere if the companies decide that the price offered by the state does not provide the return on investment “needed” to satisfy the companies’ shareholders.

If you don’t think the companies are capable of withholding needed capacity, you need only recall PSEG’s threat to close its nuclear plants unless each received subsidies, a threat that if carried out, could have compromised the reliability of the state’s electric grid. Is it unreasonable to assume that the same fiduciary duty alleged by PSEG to justify the threatened closure of its nuclear plants could just as easily be alleged as a basis to withhold needed FRR capacity from the state? As to how Exelon might react, the recent headlines regarding subsidiary ComEd’s “relationships” with key Illinois legislators speak volumes. In a word, one high-stakes game of regulatory chicken is one too many. Just ask the BPU commissioners.

To put the potential costs associated with the companies’ FRR proposal in perspective, the Independent Market Monitor projects that capacity prices alone could increase by up to $605 million, or 155% over current PJM auction levels. PJM’s former chief economist similarly projects capacity price increases of $735 million over current PJM levels. These projections are consistent with the experience of the few regulated jurisdictions like Virginia that have adopted FRR, in which customers pay capacity costs up to four times higher than in PJM. It has been projected that if these rates were adopted here, they could increase ratepayer costs by an additional $2 billion annually.

Finally, while eye-popping, it is important to underscore that these projections do not take into account (i) the potentially exorbitant increases that could result from exercises of market power and (ii) the significant value to be assigned to the bundled environmental attributes, which provide the basis for the $300 million nuclear subsidies. It is noteworthy that although the companies acknowledge their proposal will increase costs, they have declined to quantify the increase.

Cure is worse than the disease

Numerous commenters, including the Independent Market Monitor, agree that only offshore wind facilities would fail to clear the PJM auction under the FERC order. Thus, there is no basis for the companies’ dire predictions that the FERC action could deprive the state of hundreds of millions of dollars in capacity revenues for clean-energy resources and undermine the state’s energy policies. In fact, the IMM and several renewable energy companies, including Ørsted, the awarded offshore wind developer, agree that the loss of capacity revenues would be limited to between $18 million and $40 million annually beginning in 2024 when the windmills commence operation.

In sum, the potential costs and regulatory harms associated with the companies’ FRR proposal are so extraordinary, and the benefits so attenuated, that it is evident the proposed cure is far worse than any illness attributable to the FERC order. This explains why the companies so readily volunteered to forfeit $300 million annually in nuclear subsidies, apparently without concern about violating their fiduciary obligations to shareholders. The companies’ proposal should be recognized for what it is — a carefully packaged construct designed to leverage their considerable market power to generate windfall profits for their nuclear fleet. In this COVID economic environment, it is particularly important for the state to reject the proposal, and FRR generally, to avoid imposing an extraordinary financial burden upon unsuspecting ratepayers, the struggling business community and the state economy, all for the exclusive benefit of two highly profitable companies.